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RBA lifts cash rate by 25 basis points

May 6, 2022 |GODFREY DINH

As widely anticipated, the RBA lifted the cash rate by 25 basis points on Tuesday.

It was the first rate increase in 11 years and potentially the first in a series of rate hikes until Christmas.

Let's dive into the implications of the move and forecasts for future hikes.

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  • Labor has proposed a ‘Help to Buy Scheme’, which would provide eligible homebuyers with an equity contribution towards new and existing homes of up to 40% and 30% respectively.

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Facts of the week

  • The median house prices of all 8 regions in Canberra have crossed the $900,000 mark, according to Domain Group data.

  • 5 Canberra regions have median house values of over $1 million.

  • The most expensive region is South Canberra with a median house price of $1,962,500 and the most affordable region is Tuggeranong with a price tag of $905,000.

Diving Deeper

  1. The RBA’s cash rate is now at 0.35%. It’s the first rate rise during an election campaign since 2007, when Kevin Rudd became Prime Minister after defeating John Howard.

  2. The 25 basis point increase has blindsided banks, economists and financial market watchers. Those who did expect a rate rise in May mostly expected a more modest 15 basis point increase, which would have taken the cash rate to 0.25%.

  3. In the April RBA meeting minutes, the central bank stated data over coming months would inform their cash rate decision. However, the RBA appears to see a strong case for immediate action, as it has opted to move before waiting for wage growth figures (due May 18) and national accounts data (due June 1).
  4. It didn’t take long for the major banks to take action. Tuesday evening saw 3 of the big 4 pass on the rate rise in full. By Wednesday morning, NAB had joined CBA, ANZ and Westpac in changing its policies in response to the RBA’s decision.
  5. It’s possible that we’ll continue to see rate rises all the way till Christmas. On Tuesday, RBA Governor Philip Lowe revealed the cash rate profile was 1.5%-1.75% by the end of 2022 and 2.5% by the end of 2023. Lowe noted that they had chosen a 25 basis point increase as a sign that the RBA was returning to “business as usual”.
  6. CBA and NAB believe the rate will be increased by 25 basis points in June, July, August and November. This would take the cash rate to 1.35% by the end of 2022.
  7. Westpac expects a more substantial 40 basis point rise in June, before returning to 25 basis point rises in July, August, October and November. This would bring the rate to 1.75% by year end.
  8. The RBA announcement also had an impact on financial markets and investors. The ASX200 closed 0.4% lower on Tuesday following the rate hike news, according to CommSec.

What does this mean for you?

  • What everyone wants to know is how interest rate increases will affect their property’s value. A 2 percentage point rise in interest rates could see prices fall by 15%, according to the RBA. Further analysis by CoreLogic paints a picture of what potential price drops could look like:

- a 20% drop in prices = similar levels as June 2017

- a 15% drop in prices = similar levels as March 2021

- a 10% drop in prices - similar levels as June 2021

- a 5% drop in prices = similar levels as September 2021

  • It’s important to look beyond the doom and gloom often presented in the media. By running the numbers, it’s not difficult to see the impact of the rate rise. According to calculations by Pizza & Property, a property investor with a $400,000 mortgage whose interest rate is increased by 0.25% to 3% would pay an extra $12.27 per week on a principal & interest loan. That’s equivalent to about 3 coffees.

  • If you’re one of the millions who took out a fixed-rate home loan in the past 2 years and if there’s some time remaining in your fixed term, you’re likely to be safe from a rise in mortgage repayments for now. Regardless of where you are in your fixed term, make sure to know what your revert rate is (the interest rate you’ll be on after your term ends) and when your fixed term expires.

  • If your fixed term is nearing an end or if you’re on a variable rate, it’s time to do some number crunching and decide whether you want to fix your rate or go shopping for a new home loan. It’s never a good idea to leave this to the last minute, as you don’t want to find yourself in a situation where your fixed term has expired and your bank has bumped you up to your revert rate .

  • If you are considering buying a property or are in the process of purchasing, it’s wise to find out from your broker or lender how your borrowing capacity might be affected by any rate or bank policy changes. Not all changes are immediate (for example, CBA’s changes to variable rates will come into effect on May 20) so you may have some time before it’s locked in.

Prices at a glance

Houses

Units‌

Most capital cities saw price growth across both houses and units. Adelaide property owners were the winners in April, with value growth leading in the city for both houses & units.

Property values in Sydney & Hobart eased while prices stayed unchanged in Melbourne. Both house and unit prices fell in Sydney, while only house prices declined in Hobart. Unit prices in Melbourne & Hobart grew.

The capital city average values recorded no movement. Across the regional market, house & unit prices increased by 1.4% and 23.9% respectively.

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GODFREY DINH

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